After years of hype, trendy low-cost carrier Virgin America (NASDAQ: VA) finally began flying from its base in San Francisco to Hawaii three months ago.
Apparently the new flights have been a success. On Tuesday, Virgin America announced that it will start flying to Hawaii from its other main focus city -- Los Angeles -- beginning in early May. This confirms informal plans CEO David Cush laid out almost a year ago.
Virgin America enters Hawaii
Virgin America launched daily service from San Francisco to Honolulu in early November, followed by daily service from San Francisco to Maui in early December. With these new routes, Virgin America aimed to take advantage of its loyal customer base in the Bay Area and strong travel demand to Hawaii.
Virgin America picked a good time to enter the Hawaii market. Hawaiian Airlines parent Hawaiian Holdings (NASDAQ:HA) recently reported that West Coast-Hawaii airline capacity growth slowed in the second half of 2015 following more than a year of double-digit growth.
This favorable environment allowed Hawaiian to post unit revenue growth in the domestic market during Q4, something not many airlines have managed in the past few quarters. Hawaiian Airlines' management also noted that as of late January, West Coast-Hawaii industry capacity was scheduled to rise just 5% in Q1 and then decline 1% year over year in Q2.
New flights on the way
Virgin America's new Los Angeles-Honolulu flights are scheduled to take off in early May, followed by Los Angeles-Maui flights in mid-June. This is just when West Coast-Hawaii industry capacity trends will probably be at their most favorable point, based on Hawaiian Airlines' analysis.
In fact, capacity trends in the Los Angeles-Hawaii market already look very promising. In December, airlines offered 4.7% fewer seats from Los Angeles to Hawaii than they did a year earlier, according to the Hawaii Tourism Authority. For Honolulu and Maui specifically, the declines were 7.1% and 8%, respectively.
Virgin America will still face plenty of competition -- from both Hawaiian Airlines and all three legacy carriers -- in both of its Los Angeles-Hawaii markets. However, Virgin America has faced a similar competitive environment for its flights to New York for nearly a decade. Yet those are its most lucrative routes.
The new Los Angeles routes will also allow Virgin America to offer better connecting flights to Hawaii. For example, customers can take early morning flights from several Virgin America cities and connect in Los Angeles to the 10:35 a.m. flight to Honolulu. By contrast, the San Francisco-Honolulu flight leaves too early to carry much connecting traffic.
Furthermore, Virgin America has retimed its San Francisco-Maui flights to depart in the evening every day. Originally, this route had an early morning departure three days a week, meaning that connections were only feasible four days a week. Offering more connecting opportunities to both Honolulu and Maui will be especially valuable for keeping planes full during the off-peak season this fall.
Expecting solid earnings growth
In 2015, Virgin America produced higher unit revenue growth than most of its competitors. A few tailwinds should enable it to maintain this outperformance in 2016. Competition in the key New York-San Francisco and New York-Los Angeles markets is easing. Competitive capacity trends in Dallas also appear favorable. Additionally, new revenue management tools are driving ancillary revenue growth.
Virgin America's decision to start flying from Los Angeles to Hawaii suggests that the San Francisco-Hawaii routes have performed well so far. This strength in Hawaii is just one more reason to expect Virgin America to post a strong unit revenue performance in 2016 -- which could do wonders for its stock price.